PENSIONERS and those approaching retirement are set to benefit from new rules allowing them to buy additional benefits that will effectively increase their weekly state pension.

Something to celebrate - Over 65s will get an extra £1 a week per lump sum of £890[GETTY]

The Government has just announced details of the new scheme, which will permit eligible individuals to make payments via a special class of voluntary national insurance contributions known as 3A.

This will affect both existing pensioners and those who are due to retire before April 6, 2016.

“Those eligible will be able to buy additional state benefits of up to £25 each week to boost their state pension,” explained Patrick Connolly from adviser Chase de Vere. “This amount will be index-linked so it rises with inflation, and 50 per cent of the amount can also be inherited by a surviving spouse.”

The aim of the top-up is to help boost payouts for those who will miss out on the new flat-rate state pension, which will be set at around £155-a-week. This is due to come in from April 2016.

This could be favourable to women because, on average, they live longer than men.

Chase de Vere adviser Patrick Connolly

The price of the top-ups will vary depending on a person’s age but figures from the Department for Work and Pensions (DWP) show that for a 65-year-old, a lump sum of £890 would buy you an extra £1 per week on your pension. To get the maximum £25 a week, the cost will be £22,250. The cost comes down the older you are when you apply.

In effect, the scheme will be open to men aged over 63 and women over 61 in April 2014. Those who stand to benefit are people who have failed to build up extra entitlement to additional state pension benefits during their careers. This is likely to include groups such as women and the self-employed.

“Those set to benefit the most will be people who live the longest, as they will continue to receive this higher state pension for longer,” said Connolly. “Again, this could be favourable to women because, on average, they live longer than men.”

According to experts, the terms offered for the scheme look better value than those for a comparable annuity. An annuity is usually a one-off deal in which a pension fund is exchanged for a regular income that is guaranteed for life.

However, according to Ros Altmann, a former government pensions adviser, the new deal is about “half the cost of buying an annuity” from an insurance company.

“The State pension top-up is equivalent to an annuity rate of 5.8 per cent,” she said. “And the market rate for an inflation-linked annuity is around 2.9 per cent.”

Laith Khalaf from adviser Hargreaves Lansdown agrees that it seems a better deal.

“The scheme looks generous compared to buying an annuity from an insurance company,” he said. “It is an olive branch from the Government to those who retire before the new single-tier state pension is introduced in 2016.”

Related articles

According to DWP estimates, more than a quarter of a million older people might buy this extra state pension, concentrated among those in their 60s.

That said, there may be some cases where the top-up deal does not make sense.

“People in poor health could be entitled to an enhanced annuity paying a higher level of income,” said Connolly.

At the same time, someone who is single and who does not need provision for a partner, might also find that the top-up scheme does not offer such an attractive deal.

Equally, pensioners and those about to retire need to consider all their options, not least because the income on the new top-up scheme is taxable.

“It is vital to seek alternatives, such as putting the money into an individual savings account (Isa) where the income, in effect, will be tax-free,” said Connolly. “This should certainly be considered if the person is likely to live for less than the average lifespan.”

This is a view shared by Khalaf, who added: “Some savers should pause to consider whether or not an Isa would be a better, more flexible home for their money, if they are willing to take more risk.”

What action do you need to take?

The top-up offer starts in October 2015 but there is only an 18-month window to take advantage, so you must do so before April 2017.